Starting a new business? Here’s what you need to know about Making Tax Digital 

Making Tax Digital (MTD) for Income Tax applies to self-employed individuals and landlords, not limited companies. Limited companies have to use MTD for VAT, which applies if the company is VAT registered (including voluntary registration).  

If you’re unsure if you should be a sole trader or limited company, getting advice early can save you admin headaches later. 

An accountant can manage Making Tax Digital for you, including setting up MTD compatible software and submitting your quarterly updates to HMRC. You’ll still need to provide your records (income, expenses, invoices, bank information and any other supporting documents) so the data submitted is accurate.  

Many new business owners choose this route as it reduces the risk of errors and missed deadlines. An accountant can also help you choose software that’s right for your business whether you’re a sole trader, landlord or both.  

Under Making Tax Digital you’ll need to keep digital records of your income and allowable expenses for each business or property income source. This means recording the date, amount and category of each transaction (e.g. rent received, materials, travel, repairs, agent fees, subscriptions).  

Most people also keep notes or descriptions for clarity, especially for items HMRC might query later. You can do this through bookkeeping software linked to your bank feed or by uploading receipts and tracking expenses as you go.  

Keeping records regularly helps avoid a last minute rush at the end of the quarter or tax year. 

If you miss an MTD submission deadline, HMRC will use a points-based system to apply penalties for late submissions. Each missed update adds penalty points and once you reach a certain threshold you may get a financial penalty.  

Using software reminders, or getting an accountant to manage deadlines, can reduce the risk significantly. 

The main purpose of Making Tax Digital is to reduce errors and improve compliance by moving record keeping into digital systems. HMRC wants people to keep records in real time and submit updates more frequently rather than one annual tax return.  

Making Tax Digital will affect how you record and report income if you currently use paper records or only update once a year. If you’re in scope you’ll need to use compatible software and submit quarterly updates to HMRC and then an end of year process.  

This means more frequent admin but can reduce year end workload and improve record quality. For many new business owners and landlords the biggest change is just building a habit early and using the right tools from the start. 

To set up Making Tax Digital you’ll need to choose MTD compatible software for your business or rental income. You then register with HMRC (at the right time) and ensure your software can connect to HMRC for submissions.  

From there you keep digital records and submit quarterly updates based on your figures in the software. If you’re unsure what to choose or how to connect everything properly an accountant can guide you through the setup and ensure you’re compliant from day one. 

It is worth noting that once you have opted in to MTD, you’re committed for the next three tax years. Most self-employed individuals can’t opt out of Making Tax Digital simply because they don’t want to use it.  

However some people may be eligible for an exemption if they are digitally excluded, for example due to disability, age, location or another serious barrier to using digital tools. You can find out more about who is eligible for digital exclusion here. HMRC apply these exemptions strictly and assess them on a case by case basis. If you think you qualify you must contact HMRC and follow the exemption process rather than assuming you are exempt.